- In This Issue
Black Swan Events Are on the Rise. Is Your Business Prepared?
Unpredictable catastrophic events don't have to be the downfall of your business
This article was published in the Q1 2011 issue of Aon One, March 2011.
Download the Keys to Success in Managing a Black Swan Event whitepaper.
A magnitude 9.0 earthquake rocks Japan and launches a tsunami that rushes all the way to the California coastline. An oil rig explodes, destroying ecosystems and economies. The financial market crashes, sending shock waves through every business sector and instantly devaluing portfolios. These are black swan events, so called because up until they became real-life happenings, no one could fathom their existence. The term is derived from two sources: Nassim Nicholas Taleb's bestselling book, The Black Swan; and the inspiration for the book's title—the discovery of actual black swans living in Australia after scientists had assumed there were none.
According to Taleb, black swan events have three major characteristics. First, they can't be predicted. Second, they carry a massive impact that isn't just felt locally or within a select industry. Third, they are characterized by a shock effect—people are completely caught off guard by the event, because they were focused on the realm of the known. That's perhaps the most unsettling aspect of the black swan: the idea that people concentrate on what they know and can extrapolate, versus looking outside their own experiences to try to fathom the unfathomable.
That's why Taleb dismisses such stalwart practices as modeling and predictive analyses—simply because the data used is within the norm for events. Instead, he says businesspeople need to venture past the norm, far past the norm. Therein lies the rub: business is geared toward the definable. The manageable. The here and now. So how can a company survive a black swan event?
"You can't prepare for an event, but you can prepare for the impact," says Nancy Green, executive vice president, Strategic Account Management, Aon Risk Solutions. For that, companies need to step out of their day-to-day operations and think in terms of institutional readiness for the future.
According to Green, scenario planning—the practice of outlining various scenarios that can affect a business through environmental or cultural changes—can be easily retooled to think in broad terms about catastrophic black swan events. While a company can't develop scenarios for every conceivable occurrence, it can still look at possible outcomes and the effect on an organization's response to a black swan.
PLANNING FOR THE UNFORESEEN
"Scenario planning is helpful," she says. "But you can't get too wrapped up in planning for a specific scenario, because you'll be geared toward only a certain type of event. You can create scenarios to determine the company's readiness, but you need to remain flexible enough to adapt. So, if you frame the exercise by thinking about how your organization is impacted on every level by an event, you can discern how the company would handle itself or prepare a response…so you can manage a business and the black swan event at the same time."
"That's key," Green says. "In a black swan, it may be difficult to immediately assess the size and scope of the event. Existing solutions often don't work, the implications of a 24/7 news cycle must be managed and you may have an embattled brand and leadership."
Laurie Champion, managing director, Aon Global Risk Consulting, also thinks scenario planning is a good barometer. "It helps in identifying potential black swans …it's a good way of testing assumptions about risks and what can potentially happen in real life," she says.
NO FORCE FIT
According to Green, there are also other ways to survive a black swan. "Companies have to understand that their emergency plans don't fit … so you can't force a solution from an off-the-shelf plan and expect it to work," she says. "You've got to employ survivor psychology, including something called 'active passiveness.'" That means taking a collective step back and looking at the event unfolding. Pieces of the solution usually are there, but the urgency means companies plunge headlong into problem-solving mode, often with disastrous results.
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